Contracts II - Conditions Flashcards
How can conditions be categorized chronologically?
Precedent
Concurrent
Subsequent
What three types of conditions exist there? (important for interpretation)
How does the professor categorize these for simplicity?
1) Express
2) Implicit
3) Constructed
Express are the same as inferred (implied in fact)
What does the Restatements (First) say on interpretation of conditions?
The RESTATEMENT OF THE LAW OF CONTRACTS states:
$261. Interpretation of Doubtful Words As Promise or Condition
Where it is doubtful whether words create a promise or an express condition, they are interpreted as creating a promise; but the same words may sometimes mean that one party promises a performance and that the other party’s promise is conditional on that performance (note: that is the case with bilateral contracts, where there exist always two constructed conditions).
Taken from Restatements (First):
A, an insurance company, issues to B a policy of insurance containing promises by A that are in terms conditional on the happening of certain events. The policy contains this clause: “provided, in case differences shall arise touching any loss, the latter shall be submitted to impartial arbitrators, whose award shall be binding on the parties.” Is this a condition or a promise?
This is a promise to arbitrate and does not make an award a condition precedent of the insurer’s duty to pay.
Taken from Restatements (First):
A, an insurance company, issues to B an insurance policy in usual form containing this clause: “In the event of disagreement as to the amount of loss it shall be ascertained by two appraisers and an umpire. The loss shall not be payable until 60 days after the award of the appraisers when such an appraisal is required”. Is this a condition or a promise?
This provision is not merely a promise to arbitrate differences but makes an award a condition of the insurer’s duty to pay in case of disagreement.
What does Restatements §225(3) say about conditions?
The general rule is that the non-occurrence of a condition is not considered a breach by a party unless that party is under a duty to ensure that the condition occurs.
In other words, if a condition specified in a contract does not happen, and neither party is obligated to make it happen, it typically does not give rise to a breach of the contract.
Restatements §225(3):
The general rule is that the non-occurrence of a condition is not considered a breach by a party unless that party is under a duty to ensure that the condition occurs.
Which leeway have courts in interpreting such conditions?
The same term in a contract may be interpreted by courts in different ways. It can be seen not only as making an event a condition for one party’s duty but also as imposing a duty on the other party to ensure that the event occurs.
Even when a contract does not explicitly impose a duty on a party for the occurrence of a condition, the court may, in certain situations, supply or imply such a duty.
Highland Inns Corp. v. American Landmark Corp. (1983) involved the payment of earnest money. Why did American Landmark Corp. try to argue that there was no contract because the condition preceding?
If that were true, there would have been no contract and they could have claimed damages under quasi-contract (restitution) for unjust enrichment.
Where did we have the case of a preceding condition leading to a failure of contract?
Smith v. Toyota. The contract was conditional on the wife’s approval, which was not given.
What happens to a conditional promise if the conditions fails?
It turns into an illusory promise.
What is the trend nowadays for courts with earnest money?
More courts treat them as liquidated damages.
What is test for liquidated damages? (repetition)
Whether they are reasonable. Reasonable at the time they were constructed not at the time of the damage. It’s possible that the actual damages might be much higher or lower. Courts will not consider this.
Highland Inns Corp. v. American Landmark Corp. (1983) is such an example. The actual damage from the resale of the building was much higher to Highland Inns than the liquidated damages (earnest money).
Howard v. Federal Crop Insurance Corp. (1976) - what did this case teach about insurance policies?
They are full of conditions to avoid having to pay insurers.
5(f) The tobacco stalks on any acreage of tobacco of types 11a, 11b, 12, 13, or 14 with respect to which a loss is claimed shall not be destroyed until the Corporation makes an inspection.
Howard v. Federal Crop Insurance Corp. (1976) - How did the court interpret this? As a condition or a promise?
The court interpreted this as a promise (forfeiture).
However, according to the professor, this could have easily been interpreted as a condition.
In Electrol, Inc. v. Kern contractors Inc. (1981), the parties had agreed to involve a third party (an architect or engineer) to determine if additional costs were generated and, thus, a sub-contractor should be compensated. Did the court find that this could be challenged?
No. Courts have held such arbitration clauses as binding. Exceptions are bad faith or failure to exercise honest judgement. Court held that the provision was sufficiently clear and conclusive, therefore binding.
Important: What is the professor’s conclusion on conditions and why they are not in the Restatements?
What needs to be analysed?
It’s always possible to state the same condition for preceding and subsequent. That’s why you don’t find either of these terms in the restatements.
Preceding or subsequent does not matter to the analysis. What matters if it’s a condition, a promise, both, or neither.
Is it possible to describe all conditions as precedent if only the form of the condition is considered?
It is possible to describe all conditions as precedent and all conditions as subsequent if only the form of the condition is considered. The question must always be asked, precedent or subsequent to what? There must be a reference point in the transaction to which the condition is related. In terms of substance, if an existing contractual duty cannot be activated until a condition has occurred, the condition is necessarily precedent.
What two standards of satisfaction exist?
Absent express contractual language indicating which standards to apply, which is the standard used by courts?
The objective reasonable satisfaction standard: applied for commercial quality, operative fitness, mechanical utility by persons capable of judging
The subjective reasonable satisfaction standard: applied for personal aesthetics and taste
Absent express: Objective
If artworks are not to the personal liking of buyers, do buyers have to buy it? Do we find this in the restatements?
No. Subjective reasonable satisfaction standard.
RESTATEMENT (SECOND) OF CONRACTS § 228, comment a, supports this standard: “If the agreement leaves no doubt that it is only honest satisfaction that is meant and no more, it will be so interpreted, and the condition does not occur if the obligor is honestly, even though unreasonably, dissatisfied.”
It is hard to prove that it’s not honest satisfaction (this is a good faith standard).
What would be an obvious example of an architect exercising bad faith?
if they refuse to examine the work performed.
Under the Uniform Commercial Code (UCC) where parties in a contract rely on the judgment of a specific expert to determine the price of certain items they are buying or selling and if the parties have explicitly chosen this expert, not just as a reference but as a crucial condition for their buying and selling duties, what happens if this expert is unavailable?
Scenario A: Artwork
Scenario B: Commodities
UCC § 2-305
Scenario 1: Work of Art
If the expert’s judgment is vital to determine the price of a work of art, and the parties have specifically chosen this expert, the contract might not proceed if that expert is not available. In this case, there’s no substitution with a standard of reasonableness.
Scenario 2: Commodity
On the other hand, if the expert is named to determine a specific grade of a commodity like cotton, the assumption is that the parties would be bound by the contract even if that particular expert is not available. In this scenario, the contract is expected to move forward even without the originally designated expert.
What does “Sale on Approval” mean under the UCC?
What does the UCC say about determining if parties have entered into a contract with “Sale on Approval”?
Under the UCC, “Sale on Approval” refers to a provision (§ 2-326(1)(a)) allowing a buyer to return goods, even if they conform to the contract, in transactions characterized as “sales on approval.” A sale on approval is a type of sale where the buyer has the right to inspect the goods before deciding whether to accept or reject them.
However, the UCC doesn’t provide specific tests to determine if the parties have indeed entered into such a contract, leaving the determination to common law principles.
According to the book, how are conditions created?
According to the book, conditions are created by either of two methods:
Express Conditions: Created when the parties manifest an intention (by words or conduct) that the duty to perform is subject to the occurrence of some fact or event other than a mere lapse of time. These conditions are “real” conditions established by the agreement of the parties, and the agreement may be manifested in words or by conduct. When created by the conduct of the parties, they may be referred to as “implied in fact” conditions.
Constructive Conditions: Created by a court, in the interests of equity and justice, even though the parties have not manifested such an intention. This occurs when the court reads a condition into a contract for reasons of its own, notwithstanding the lack of any manifestation (words or conduct) by the parties. Constructive conditions are constructed by the court in the pursuit of equity and justice.
In what situation can the discovery of a condition be justified on either of two theories (express or constructive), and the court is likely to ignore the distinction in discovering a condition?
The discovery of a condition can be justified in a situation where the manifestations of intention are uncertain, making it difficult to determine whether a court may justifiably find that the parties intended a condition. In such cases, the court is likely to ignore the distinction between express and constructive conditions and may discover a condition based on either theory (We have seen this in several cases, the courts do not make that distinction).
Why were earlier courts reluctant to openly acknowledge that they could “make a contract” for the parties?
Earlier courts were reluctant to openly acknowledge that they could “make a contract” for the parties because they were hesitant to exercise such a significant role in altering the terms of the agreement. This reluctance was based on a traditional view that courts should interpret contracts rather than actively shape or create contractual obligations. The courts often disguised their role in altering contracts under the fiction of interpretation, avoiding direct admission of their capacity to effectively “make a contract” for the parties involved.
Modern courts, however, have become more willing to admit that conditions may be found to exist, even if it goes against the manifested intention of the parties. This shift in approach reflects a recognition that, in certain situations, discovering or establishing conditions may be necessary to achieve a just and equitable result, especially when strict adherence to the parties’ intentions could lead to unfair or unjust outcomes.
A franchise agreement provided that the agreement could be terminated if the franchisee was in breach, but was silent as to whether it could be terminated by the franchisee where the franchisor had breached. The franchisor had committed many breaches but the franchisee could not establish damages. What did the court hold and do to create a just and equitable result?
The court held that the failures of the franchisor to perform were not only breaches of its duties but also failures of conditions precedent to the activation of the franchisee’s duties. In doing so, the court essentially treated the franchisor’s breaches as conditions that needed to be satisfied before the franchisee’s duties could be triggered. This approach prevented the franchisee from being left without a remedy, even though damages could not be established, and aimed to achieve a just and equitable result in light of the contractual silence regarding termination by the franchisee for the franchisor’s breaches.
What are the three common failures of manifestations of intent in a bilateral transaction?
- The order in which respective promises must be performed.
- The effect of partial failure or delay in performance on the rights and duties of the other party.
- The effect of prospective inability or unwillingness of one party to perform on the rights and duties of the oIther party.
In a contract where A agrees to work for B for one year with a $36,000 salary, what vital information is often missing, and how does this absence impact the determination of rights and duties when disputes arise?
The contract lacks specifications regarding the order of promise performance, the consequences of partial failure or delay, and the impact of a prospective inability or unwillingness to perform. This absence necessitates the law to “make a contract” for the parties, particularly when specific questions about mutual performances arise, preventing potential injustice.
If there is no order of performance specified in the contract, which order does the Restatements assume?
Concurrent performance. Restatements (Second) §234.
In Bell v. Elder, the parties were in a “deadlock” situation. Neither of the parties have performed (obtained a building license and provided water). What did the court here do?
The court constructed conditions for both sides to excuse both duties to perform as neither of the conditions have been satisfied.
What do conditions do in relation to duties or obligations?
Conditions either discharge duties or obligations or activate them.
Through the application of constructive conditions, what did courts achieve in comparison to the situation before that approach?
Before that approach, parties with a contract could sue each other for non-performance (breach). There was one law suit for each promise (hence two lawsuits). They could not be combined as the promises were independent. This was inefficient and expensive to the parties.
What does “to tender performance”, e.g., to tender payment mean in the context of contracts?
It means demonstrating willingness, readiness, and ability to perform, e.g., conduct the payment.
Under the old approach, promises were independent from each other. What did the new approach with constructed concurrent conditions create?
Through this approach, conditions became dependent on each other. If a party has not tendered performance, it can also not sue the other party.
What the is the intention behind courts imposing conditions on each party?
To enforce justice.
Assume that two parties agree that one party will deliver dresses. Payment will be due three days after delivery. Which of these promises are dependent or independent?
The promise to deliver dresses is independent
The promise to pay three days later is dependent on the delivery.
These are constructed conditions. These are conditions preceding.
What two purposes do constructive conditions have?
First, to order the sequence of performances.
Second, to bar parties from legal remedies until they have tendered their performance or performed themselves.
